4.
~/~ SOHO Help Desk ~\~
http://www.demc.com
"How To Avoid the Top 10 Tax Return Errors"
Today's SOHO Help Desk is from a long time contributor to
DEMC E-Magazine, Sandy Botkin. Sandy was a former trainer
of IRS attorneys and currently he lectures nationally to
self-employed people and companies on tax issues. Recently
he sent me the information below on 10 errors people make
on their tax returns.
If you have a valuable tip, promotional idea, question or
answers you would like included in an upcoming issue of DEMC,
all you have to do is submit it by email to -
mailto:helpdesk@demc2.com
=== 10 Tax Return Errors ===
From: Sandy Botkin
Common Mistakes on Tax Returns:
I often get asked, "what are some of the biggest red flags or
mistakes that people make on tax returns?" This article
should address this question. What you will find interesting
is that some of the biggest mistakes are easily correctible.
1. Omitting income: Income that you receive in dividends,
interest, commissions and, stock trades get reported to the
IRS on FORM 1099.
This becomes a common problem when people move since
they may not receive all their 1099s. If what IRS receives
doesn't match what you report on your tax return, you will
be "invited" for a chat by the IRS. Make sure that you don't
lose any FORM 1099s, and give them with your tax
questionnaire to your accountant.
Tax Tip: Make sure that you notify the post office of any
change of address and also notify any investment institution
of your move. Thus, notify all banks, stock brokers,
financial planners etc. of your move.
2. Review Prior year's tax returns: As friendly as you may
be with your accountant, he or she doesn't have your entire
tax history in their memory.
Look over your last year's tax returns for items that may
affect this year's return such as loss carry forwards, unused
passive losses etc. For the record, if you have any business
losses, you may carry them forward and use them to offset
up to the next 20 years of income. If you have capital losses,
you get to carry them over forever and use them against any
capital gains. If you don't have capital gains, you get to use
up to $3,000 per year against any type of income. Needless
to say, don't lose these carry forward schedules.
3. Be organized when you see your accountant: It is truly
astonishing how many people come into their accountant
completely unprepared with a shoe box full of disorganized
receipts.
It is crucial that you organize your receipts by expense
category and complete a tax questionnaire that most
accountants have. Be prepared to come with a list of tax
questions or tax strategies.
Tax Tip: If you have any kind of business or real estate
investment, you should get my programs, "Tax Strategies
for Business Professionals" and "Wealth Building Tax
Secrets for Real Estate" and have listened to them before
any meeting with your accountant.
4. Don't over pay your taxes on stock and mutual fund
sales: When you sell stock or mutual fund shares, you only
pay tax on the difference between your sales price and your
basis.
Sadly, many people make mistakes in computing their basis.
This is especially true if you invest in mutual funds. For
example, when you pay tax on the gain from the fund, you
increase your basis in your mutual fund shares. Also, if
there is a dividend reinvestment, you also increase your
basis. You need to keep track of your stock and mutual fund
basis each year. Thus, you should have a schedule for each
fund that you own that keeps track of your basis. Your
accountant won't do this.
Example: You paid $10,000 for some mutual fund shares
and reinvested $1,000 worth of distributions. Your basis for
both gain and loss is $11,000.
5. Not substantiating charitable deductions correctly: Most
people are realizing that it is better to give than receive,
at least tax wise.
When you contribute property to a charity that you held for
more than a year, you generally can deduct the fair market
value of the property at the date of the donation regardless
of your cost basis. However, most people are not aware of
the strict substantiation requirements for charitable
deductions
a. Contributions of $250 or more: If you contribute cash or
property of $250 or more to a qualified charity, you must
also substantiate this contribution by a contemporaneous
written acknowledgment from the receiving organization
and have a copy of the check. Thus, you may be asking,
"what is a contemporaneous written acknowledgment?"
You should request a written statement from the charity that
states: 1) the amount of cash and description of the property
contributed and, 2) whether the charity provided any goods
or services in consideration for the contribution, and, if
goods an services were provided by the charity, 3) a
description and good faith estimate of the value of those
goods and services
b. Non cash contributions of $500 or more: If you make
any gifts of property over $500 but less than $5,000, you
must submit, in addition to the substantiation noted above,
IRS FORM 8283 to your tax return, showing certain required
information.
c. Non cash contributions exceeding $5,000: For charitable
gives exceeding $5,000, you must also obtain, in addition to
the substantiation requirements noted above, a "qualified
appraisal" for each item donated, and attach an appraisal
summary, IRS FORM 8283 to your tax return. This has
usually been a big problem with people donating cars due to
the "higher" fair market values of these vehicles.
Author's note: If you are wondering why Congress would
put in such idiotic and an onerous requirement, the reason is
based on the golden rule: "He who has the gold, makes the
rule." By making things more difficult, Congress can make
your deduction more difficulty, which provides more
revenue if you don't adhere to these rules.
6. Failing to sign tax return: Amazingly enough, one of the
biggest reasons people get audited is that they fail to sign
their tax return. Make sure that you sign your tax return, and
if you file jointly, your spouse also signs the return.
7. Put the correct social security number on your tax return:
Another big mistake that causes an increased audit risk is
using the wrong social security number of transposing
numbers for your social security.
Make sure that you have the right social security number of
the taxpayer. I should also note that you need the correct
social security number in other places of your tax return. For
example, if you are claiming dependants, you need to show
what there social security number is. Likewise, if you claim
any alimony payments, you need to report the social
security number of the person receiving the payments. Also,
name changes (such as that caused by marriage) that don't
match social security numbers can be a real problem. You
should promptly report a name change to the Social Security
Administration by filing FORM SS-5 at its local office nearest
you.
8. Overpaying social security taxes: If you received
payments from two or more jobs and earned more than
$87,900, you may be able to file a claim on your tax return
for the excess social security withheld.
For 2004, wages over $87,900 are not subject to social
security; however, there is no limit on the 2.9% Medicare
withholding.
9. Make sure that IRS receives your tax return: My dad has
a friend that sent in his tax return using the post office
with a $15,000 check.
Both the return and the check were lost by the postal
service. My father's friend paid in the $15,000 plus $11,000
worth of interest and penalties. Always send in your tax
return either registered mail, federal express or, even
better, electronically. Electronic filing is very convenient since
there are no lines and can be done any time of day. Refunds
also can come about two to three weeks quicker. Moreover,
the accuracy of electronically prepared returns is much
better than that done manually. According to the IRS, the
error rate for manually done returns is 21%; however, the
error rate for e-filed returns is less than 1%. You also get
proof that IRS received the return in case of problems. This
proof can save you potential penalties in the long run.
10. Make each check to the IRS state what it is for: Any
check sent to the IRS that doesn't clearly state what it is
for and for whom it is applied may be lost or misapplied.
It is important that you write on the check: 1) your social
security number, and that of your spouse if you file joinly,
and 2) the tax period for which the payment was made. If it
is for a business, use the employer identification number.
Here is the problem: if you don't designate the payment for
a particular tax or period, the IRS can apply it towards
anyway it chooses. Thus, if you have an ongoing tax dispute
or pay different types of taxes, this IRS option can be very
detrimental to you.
Sandy Botkin, CPA, ESQ.
Tax Reduction Institute
http://www.taxreductioninstitute.com
Check out my new 5 star rated book, "Lower Your Taxes:
BIG TIME", published by McGraw-Hill. Visit your local
bookstores or go to amazon.com and barnesandnoble.com.
===
If you have a valuable tip, promotional idea, question
or answer you would like included in an upcoming issue
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